Technology

Internet Marketing: Is Regulation Coming?

Lawmakers are looking at regulating the ways Google, Yahoo, Microsoft, Facebook, and the like track Web-surfing patterns to aid marketers

The impetus to regulate online marketing may be gathering steam. On June 18 a House of Representatives subcommittee held a hearing to take a closer look at how advertisers gather and use information on consumers' Web-surfing habits.

Up to now the government has had a hands-off policy toward online marketing, giving companies relatively free rein in how they use tools that track what people do online and then use that data to deliver tailored marketing messages. Although regulation is likely to be far off, it would surely rewrite how Google (GOOG), Yahoo! (YHOO), Microsoft (MSFT), Facebook, and a wide range of other Internet companies grapple for share in the $25.7 billion online ad market.

The hearing, which brought together representatives of Web companies and online privacy advocates, may mark "the beginning of the end of self-regulation for online advertising," says Marc Rotenberg, executive director of the Electronic Privacy Information Center (EPIC).

Advocates of regulation say Internet companies need to be more up-front about their use of so-called behavioral targeting, which includes placing "cookies" and other software designed to discern a computer user's tastes and preferences—information that marketers can use to better deliver online ads. Representative Rick Boucher (D-Va.), who chairs the House subcommittee on communications, technology, and the Internet, has stated publicly since February that he plans to draft legislation on targeting practices this year. He says sites should maintain plain-language privacy policies, visitors should be able to opt out of data collection, and any third-party companies working with publishers must obtain permission from Web users before acquiring or using their information.

Behavioral Targeting Spreads

Privacy advocates say behavioral targeting is becoming more prevalent with increased use of ad-supported Web sites and services and that it's getting easier to disguise the practice as technologies become increasingly sophisticated. "The current model is going to collapse because the amount of information being collected is out of control," says EPIC's Rotenberg.

A study released by Pace University on June 17 illustrates how pervasive behavioral-targeting tools can be on a single Web site. Associate professor Catherine Dwyer discovered that the shopping site for Levi Strauss automatically plants "beacons," or tracking files, from nine different companies onto a visitor's computer when it arrives at the home page. These third parties included so-called behavioral ad networks, including Right Media, Tribal Fusion, and Specific Media, which apprise a site of a visitor's behavior on other sites. To Dwyer's surprise, Levi Strauss had informed users in its online privacy policy that it was using only a single partner, Microsoft-owned Avenue A. Levi Strauss says Microsoft lines up these other partners and changes them frequently and that it therefore didn't deem it necessary to list these other companies in its privacy policy.

Dwyer says such a lack of transparency not only compromises user privacy but also hurts the brand. "Does Levi's want to have this kind of relationship with their customers?" Dwyer asks. She adds that this project was a case study of one company and therefore doesn't necessarily indicate broader trends. But generally, she chose Levi's partly in the interest of "selecting a product most people could relate to," and because fashion is among the industries, such as autos and finance, that are known to rely on behavioral targeting to stay current with consumer tastes.

Big Internet companies say they are giving users more control over their privacy than ever before. During the congressional hearing, Google Deputy General Counsel Nicole Wong demonstrated a tool introduced in March that lets surfers see which categories advertisers are pitching them based on search history, and opt in or out of any specific category, such as "auto financing" and "interior design." Yahoo's privacy head, Anne Toth, told the subcommittee that her company recently reduced the period of time it retains user data to 90 days instead of 13 months.

Both companies also highlighted a new anti-tracking technology—opt-out "buttons" that remove cookies from a user's computer without depositing new cookies.

Industry Plans New Self-Regulation

Yahoo says it does not oppose government regulation but expresses concern that any law created might not be able to adapt with changes in technology. "Self-regulation is ideal for our industry because technology moves very rapidly, and by using self-regulation we can respond in kind," says Toth.

So far, government attempts to set up guidelines have fallen short, while the industry's self-policing efforts are unwieldy. In February the Federal Trade Commission's new guidelines on behavioral targeting were faulted for not providing specific durations for how long records should be kept and failing to spell out definitions of terms like "sensitive data."

Some time this summer, the Interactive Advertising Bureau (IAB), a trade organization for online publishers, plans to unveil a set of self-imposed guidelines for the industry that were created in conjunction with the Association of National Advertisers, the Direct Marketing Assn., and other trade groups. Drafting and enforcing self-regulatory principles is difficult because it requires being compatible with many different business models, according to Mike Zaneis, vice-president for public policy at the IAB.

Washington may step into the role of regulator. "The issue ultimately depends upon the interest of the Democratic leadership in Congress and the White House to move the issue of online marketing forward," says Jeff Chester, executive director of the Center for Digital Democracy.

Silicon Valley's White House Influence

The stakes are high. According to a report released by the IAB in early June, the online ad business contributes $300 billion in "economic activity" to the U.S. and employs 1.2 million workers. At the same time, the advertising industry is sagging and increasingly turning to the Web because of tools that let it increase the efficiency of each ad dollar by tailoring pitches to individuals. "Targeting the message is fundamental to what online advertising is all about," says the IAB's Zaneis. "There clearly will be negative impacts if you cut off the flow of data and make advertising less relevant and less profitable."

The Obama Administration has been quiet on the issue of online privacy. While the President has made stronger regulation of the financial and other sectors a top priority, some wonder whether Silicon Valley's influence in the Oval Office might put the kibosh on any legislation that has the potential to constrain online advertising.

"Google has played a significant role in the Obama Administration," says EPIC's Rotenberg. But, he adds: "That doesn't mean they're above the law. I don't get the sense that [the White House] is afraid to legislate if they think it's important."